The present disclosure is generally directed to computer-implemented cost analysis, and more specifically to computer-implemented cost analysis of reciprocal business relationships.
Businesses are motivated by the market to remain competitive with respect to their competitors. One of the ways to remain competitive, for example, is to reduce costs. Such reductions in costs should accurately reflect the circumstances of the business, rather than being merely an artificial cost number which has no basis in fact. Thus, businesses should properly account for various cost pools, including, for example, costs, profits, budgets, capital, etc.
Accurate accounting for various cost pools can become complex where the business includes entities that have reciprocal relationships with each other. Traditional methods for determining the cost of reciprocal relationships include a step down method, and a simultaneous equations method. The step down method attempts to ignore reciprocal relationships in order to simplify the solution, thereby producing a solution that varies based upon the order in which the system is solved. More specifically, the “step-down” technique selectively eliminates reciprocal relationships. For example, the step-down technique ignores the cost to an entity to support itself and instead assigns the cost of a first entity to all other entities. A second entity then takes the cost (including cost from the first entity and direct cost) and assigns these costs to all other entities except for the first entity. Similarly, a third reciprocal entity takes the cost and assigns the cost to all other entities except for the first and second entities. However, this technique yields a different result depending upon the order in which the entities are analyzed. Moreover, the technique does not represent the reality of the business situation, because where the first entity and second entity support each other, the step-down method effectively ignores the reciprocal nature of the relationship by omitting the entities from the analysis after the entity has been analyzed.
Another accounting technique includes the use of simultaneous equations to solve for each of the entities. The simultaneous equations solution includes a mathematical solution that accounts for reciprocal relationships, but can produce a misleading result that can be many times the direct cost of the department. In this method, equations are developed to describe the relationships among each of a plurality of entities. These equations are then solved simultaneously. The simultaneous equations method is essentially an iterative method whereby a cost is passed back-and-forth between entities an infinite number of times to obtain the solution. The result of the calculation can appear abnormally large. For example, where many reciprocal relationships exist and/or the magnitude of the mutual reciprocity is large, the cost can be many times the direct cost of an entity because the cost is passed back and forth an infinite number of times.